Diversification is a good way to increase profits, create more value or reduce market risks from having only one or few product lines. As such, different companies diversify for various reasons, and therefore, diversification can be either related or unrelated. However, not all the companies succeed when choosing diversification as part of their corporate strategy. Like everything else, diversification does come with its ups and downs. Diversification can be beneficial, but probably up to a certain point. When companies reach a certain level of diversification, they also need to deal with more complexity. Hence, organizations should align their new production lines to a new appropriate structure that will fit with the already existing business activity. The single industry firms must reinforce or re-design their internal development, pursue value-chain synergies among business units by using their existing resources, capacities, and knowledge (related diversification). In contrast, when the new venture is unrelated to the old business, firms should branch off as new autonomous business units as the old management is not familiar with the industry.
Strategy and management teams
As such, any organization must design a consistent management control system that adapts to the new corporate strategy (differentiation). If not, it will eventually damage all the potential benefits of the diversification.
The risk comes with higher levels of diversification within a company. In this context, the corporate level managers may not have significant knowledge or experience in all various activities of the company. No surprise, some companies fail because they expect that the same management team can control all their differentiated businesses on the basis of intimate knowledge of their previous activities. As firms become more diversified and in order to succeed, they need to change the balance in the management control system.
In the controlling process of diversification,...
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